Key Points
The annual COLA is set based on changes in the CPI-W data from the third quarter of each year.
July's CPI-W rose 3.4% year over year, but inflation cooled from June.
Social Security recipients have continued to lose purchasing power in their benefits.
Few, if any, Social Security changes are as anticipated as the annual cost-of-living adjustment (COLA). Implemented at the beginning of each year, the COLA is meant to offset the effects of inflation. It's far from perfect, but any boost is much better than none.
The Bureau of Labor Statistics recently released inflation numbers that showed that inflation cooled from June to July. However, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was up 3.4% from last year.
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Let's take a look at why that has good and bad implications for Social Security recipients.
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Why July's inflation numbers matter
The annual COLA is set by examining changes in the CPI-W, but only the third-quarter (July, August, September) data matters. Here is how it works:
- Social Security averages CPI-W numbers for this year's third quarter (Q3).
- The current year's average is compared to the previous year's average.
- The upcoming COLA is set as the percentage increase, rounded to the nearest tenth of a percentage. If this year's CPI-W average is the same as or less than last year's, there's no COLA.
So, July's CPI-W numbers (327.104) will be one of three CPI-W data points used to calculate the 2027 COLA. If, for example, August and September's CPI-W numbers also come in up 3.4% year over year, you could expect next year's COLA to be 3.4%.
The bad news about the 2027 COLA
We won't know the official COLA until the Social Security Administration releases it on Oct. 14, but one thing is almost certain: Social Security recipients will continue to lose purchasing power.
According to senior advocacy group The Senior Citizens League (TSCL), Social Security benefits have lost 13.7% of their purchasing power in the past decade. That means $1,000 in benefits then would only buy around $860 worth of things today.
Part of the issue is that the CPI-W doesn't fully reflect the expenses that retirees face. It measures changes in prices of goods and services like food, transportation, housing, clothing, energy, and healthcare. However, expenses like healthcare and housing are typically more relevant to retirees than clothing or gasoline.
One proposed solution is to use the Consumer Price Index for Americans 62 years of age and older (R-CPI-E), which gives more weight to expenses seniors face more often. For now, though, that's simply a "suggestion," and the CPI-W remains the go-to, so retirees should anticipate declines in their purchasing power and adjust their budgets accordingly.
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